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September 19, 2018

Jones Electrical

Jones Electrical Distribution is a business that sells electrical components and tools to general contractors and electricians. Products sold by Jones Electrical Distribution are often used in construction and repair of commercial and residential buildings. The company is facing a shortage of cash after years of rapid economic growth. With this challenge, the company’s owner Nelson Jones is seeking a 350,000 dollar loan from a new bank, as his previous one only offered him 250,000 dollars. The bank offering 350,000 dollars, Southern Bank and Trust, has three options regarding helping Jones Electrical. The bank can extend the loan to Mr. Jones, not extend the loan, or extend the loan but on specific terms. The criteria for this decision is based on profitability, customer relations, and risk. The first alternative is for Southern Bank to extends the loan to Jones Electrical for 350,000 dollars. A benefit of extending the loan would be that the bank would be able to take advantage of Jones’s increasing sales. Jones’s sales have increased by 38.1% over the course of the years 2004 to 2006, with projected sales reaching 2.7 million dollars by 2007(Appendix A). In addition, the risk for extending the loan

September 19, 2018

Jones Electrical

would be limited, as Jones Electrical is known for being a highly trusted company in the business. Nelson Jones himself is known for his integrity and popularity amongst all managers. Another advantage of extending the loan would mean that the company would have a chance to continue to thrive and maintain the customer satisfaction that the company has been known for thus far. A downside of extending the loan would be that the company has been continuously losing cash, and the cash flow is only projected to decrease. This decrease poses a large risk for a bank interested in loaning to Jones. Another issue is that inventory turnover is low, which means that the company needs to increase sales and reduce the amount of inventory bought. Lastly Jones Electrical has suffered a 186% increase in accounts payable between 2005 and 2006 as shown in Appendix B, meaning that the company is increasingly owing money to its creditors. Both of these problems pose a low chance of profitability for the bank. The second alternative is for Southern Bank to not extend the loan. An advantage of not extending the loan would be that Rachel Montrose, the representative of Southern Bank in charge of this decision, would not

September 19, 2018

Jones Electrical

have to worry about whether Jones will be able to pay the bank back. Jones has experienced limited returns of equity and returns on sales, as these numbers are very low when they are supposed to be high (Appendix C). This fact implies that the company’s growth and stability are limited, as also it is understood that Jones would suffer a slower rate in its increase in sales during an economic downturn; this poses a high level of risk that the bank could avoid. By not extending the loan Southern Bank would avoid dealing with Jones’s irresponsible management, as they have not been able to control their debt due to inventory issues. A downside to not extending the loan would mean that the bank would miss out on the 38% increase in sales that the company has been having (appendix A). Although it is hard to project, it can be assumed that Jones Electrical has good prospects for significant future growth, which the bank would also miss out on. Jones Electrical is unique, in that there is a consistent market for the company’s product that contributes to the company’s high customer satisfaction. By not extending the loan, the company misses out on these opportunities.

September 19, 2018

Jones Electrical

The third alternative is for Ms. Montrose to extend the loan but modify the terms of the loan. A benefit to this would be that it gives the bank the opportunity to benefit from the company’s growth while setting the terms of the loan agreement to minimize any downsides. With this opportunity, Southern Bank could eliminate the 2% discount that has plagued the company and drained its money thus far. Removing the discount would make the company more profitable which in turn, would benefit the bank. Another advantage would be that the bank could manipulate the terms of the deal that is made with the company, to get higher interest rates. These higher interest rates, especially if the company grows in success, would bring more money into the bank and ultimately be beneficial. A downside to extending the loan with modified terms would be that there is still a risk that the company’s success will come to a halt, and the bank would have trouble getting reimbursed. Another disadvantage would be that in removing the 2% discount, there could be a decrease in customer satisfaction, as Jones Electrical Distribution is known for consistently and quickly satisfying its customers’ demand. The final downside to extending the loan with

September 19, 2018

Jones Electrical

modified terms would be that this could come with unexpected negative changes. The 41.2% increase in accounts receivable over the span of 2004 to 2006 caused unexpected changes in the accounts payable over the same time period, as seen in Appendix B. While extending the loan with modified terms is a low-risk option, there is still room for instances like the one previously mentioned, which can cause an increase in risk. Jones could also reject the banks’ terms, which would negatively impact the relationship between Southern Bank and Jones Electrical. Of the three alternatives, the best option is for Southern Bank to extend the loan to Jones Electrical Distribution. By extending the loan, the bank can entrust that their loan is worthwhile, as the company is highly trusted and well respected. The company also has experienced a dramatic increase in sales over the course of the years 2004 to 2006. This 38.1 percent increase lands the company with a projection of sales reaching 2.7 million dollars (appendix A), which is monumental for this business. By extending the loan, the bank can capitalize on the company’s achievements, as well as contribute to the success of this company and continue to satisfy its customers. Also, there is a ready

September 19, 2018

Jones Electrical

market for Jones Electricals’ products at all times, meaning that these products are consistently in demand. This fact a very positive aspect to consider when discussing a growing business. Although it is difficult to make projections beyond 2007, prospects did appear to be leaning towards continuing growth in the volume of Jones Electrical Distribution’s business in the near future. Extending the loan does indeed have its downsides, as the company has a few issues. Inventory turnover is low, the company is experiencing a large decrease in cash, and there was a 186% increase in accounts payable between 2005 and 2006 (appendix B). These issues, however, are not detrimental, as the company is still increasing in sales. Also, a simple influx of cash would cause reverse the problem decreasing cash, which leads to the increase in accounts payable. The issue surrounding inventory turnover is a basic operational fix, as in the future inventory should be reduced and sales should be even further emphasized. The downsides to not extending the loan are large, as the Southern Bank would completely miss out on all of the success Jones Electrical Distribution is having. The downsides of extending the loan with modified terms also outweigh the upsides, as the

September 19, 2018

Jones Electrical

manipulation of interest rates and the terms of the modifications have a high chance of alienating the company, causing it to possibly withdraw from the deal altogether. Also eliminating the 2% discount could decrease customer satisfaction, as the company is known for being quick and consistent with its responses to its customers. While the solvency equations in Appendix C, are not as high as they would need to be to meet the ideals, the company is still growing at a rapid pace, so there is room for these to change. By finding the net income and dividing it by the company’s sales, the profit margin can be found. Using the numbers provided in Appendix A, it can be concluded that the company’s profit margin remains around 1% over the course of 2004-2006 and is projected to remain at that percentage in 2007. Jones Electrical and Distribution is profiting overall as a company, which is a positive factor that should be considered as the Southern Bank extends the loan and capitalizes on the company’s successes....